Banks scramble for BoE funds as crisis worsens

By Sumeet Desai and Christina Fincher

LONDON (Reuters) - The Bank of England's emergency offer of 5 billion pounds of 3-day loans was nearly five times oversubscribed on Monday as financial institutions scrambled for cash in the face of a global credit crunch.

Aimed at restoring confidence to panicky markets in the wake of the weekend firesale of U.S. investment bank Bear Stearns, the loan offer was only the second such "exceptional" operation since the crisis began last summer.

But investors were scared things would get worse and sold the pound and stocks aggressively. Sterling's trade-weighted index hit its lowest level since March 1997 and the FTSE 100 index of leading shares fell nearly 4 percent.

The BoE said it wanted to bring overnight interest rates down. Banks were so fearful of each others' solvency on Monday they were charging more than 25 basis points above the main central bank lending rate for loans of even just one day.

"Given the money market conditions this morning, the situation is very serious and represents a new and unwanted twist to the credit squeeze," said Philip Shaw, chief economist at Investec. "Five billion pounds represents a substantial sum."

The last time the central bank took such a step was in September just after the run on Northern Rock bank, Britain's fifth-biggest mortgage lender, which was later nationalized.

PANIC EVERYWHERE

The BoE said that like other central banks it was keeping a close eye on developments. On Tuesday, it is offering 10 billion pounds worth of three-month loans in coordinated global action to restore confidence to jittery markets.